I just received a call from a client regarding DCAA’s work on their 2007 incurred cost submission. Last week DCAA had provided the client with a draft audit report that:

Disclaimed an opinion on the incurred cost submission due to unspecified scope limitations

Although they disclaimed an opinion they offered several – all of them totaling up to several hundred thousand dollars.

We responded with an email asking:

1). How you can disclaim an opinion but still issue opinions on costs?

2) Requesting the details making up these findings.

3) Reserving the right to make a management response before scheduling an exit interview (the draft report stated that an exit interview would be conducted).

4) In a telephone conversation with the client, DCAA reported that the scope limitation arose out of DCMA withdrawing funding for the audit. We addressed this in the email and both asked for clarification, and noted if this was actually the reason we believed it should be specified in DCAA’s report.

DCAA did not respond to this email and the client followed up yesterday with an email requesting the data detail in order to review it.

DCAA called the client this morning and stated the following:

They had finalized and issued the report without either an exit interview or a management response.

That the contractor’s only possible action was to address the findings with the ACO.

That even if there had been an exit interview the report would not have changed.

Of course I can only conclude that the client misunderstood and DCAA did not act in this manner.There should be more to this story to explain these decisions.

Of course I can only conclude that the client misunderstood and DCAA did not act in this manner.

Looking at DCAA’s Contract Audit Manual one would walk away with the impression that a contractor needs an accounting division with a staff of at least several people to be fully compliant: A Board of Directors, CEO, CFO, Controller, Accounts Payable Technician, Payroll Technician, to name a few of the positions DCAA appears to assume are present in a compliant contractor (don’t get me started on Internal Auditor).

Many of my clients are limited to a bookkeeper and an owner acting as CFO. Quite a few of my clients do not have the bookkeeper.

Well, what is the answer?

The trick is to think of these roles as functions and not individuals. Almost all internal controls can be minimally addressed by two people assuming the necessary functions.

It also get you started on the importance of internal controls. The FBI estimates that thirty to fifty percent of all small business failures arise out of embezzlement. I will tell you that the vast number of embezzlements can be stopped dead in their tracks by a few simple internal controls such as someone else looking at the checking account each month.

Here is the example. The person writing the checks (acting as the Accounts Payable Technician) presents them to someone else for signature (acting as the CFO). Each month, the CFO reports the bank reconciliation to the Board during their monthly financial meeting making all transactions available for the Board to review.

Another variation combines the AP and CFO function into a single individual and the report to the Board is more through (or even to an outside CPA).

I have even seem small organizations that being all checks over a certain amount to the Board for signature.

The functions are described in the company’s polices and procedures. This also allows for easy growth without heavy rewriting after time you add a position.